International Trade

Question 1

Definition of International Trade

Answer 1

Purchase, Sale or Exchange of Goods across national boundaries

Question 2

Theory of Absolute Advantage

Answer 2

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Question 3

Theory of Comparative Advantage

Answer 3

• A country will still produce and export goods that it has a relative production advantage over and not absolute advantage.
• Opportunity cost of a good is the value of what is given up in order to get the good.

Question 4

Theory of Relative Factor Endowments (Factor Proportions Theory)

Answer 4

• Countries produce and export goods that require resources (factor) in abundance, and require resources in short supply
• A country will have comparative advantage in producing policies that intensively use resources it has in abundance

Question 5

International Product Life Cycle

Answer 5

• New Product Stage
• Maturing Product Stage
• Standardised Produce Stage
• Only applies to innovative products unlike classical trade theories which apply to commodities

Question 6

New Product Stage

Answer 6

• Firm develops and introduces innovative product in domestic market
• Obtain quick feedback and improvise to meet market demands
• Minimise investment in manufacturing capacity. Small quantity produced.
• Most output is sold in domestic market and export sales are limited

Question 7

Maturing Product Stage

Answer 7

• Demand for products expand when consumers recognize it’s value
• Firm builds new factories to expand capacity
• Prices lower due to economies of scale and competition
• Satisfy both domestic and foreign demands

Question 8

Standardise Product Stage

Answer 8

• Market standardises and becomes more of a commodity
• Firms are forced to lower manufacturing costs through mass production
• Firms shift production to countries with lower labour costs
• Product begins to be imported to innovating firm’s home market

Question 9

Limitations International PLC Theory

Answer 9

Not so applicable in today’s times as innovation occurs in many nations across the world and the growth of the internet has sparked rapid globalisation activities. Companies with different core competencies are forming strategic alliances to develop new products for different markets.

Question 10

Theory of National Comparative Advantage

Answer 10

Nations competitiveness in an industry depends on the industry’s capacity to innovate and upgrade, which in turn depends on such determinants:

• > Factor conditions
• > Demand conditions
• > Related and supporting industries
• > Firm Strategy, Structure and Rivalry

Question 11

Factor Conditions

Answer 11

Basic Factors -> Nation’s Resources

Educated Factors -> Result of investing in education and innovation

Question 12

Demand Conditions

Answer 12

Sophisticated home buyers -> companies improve existing products and develop new products and technologies

Question 13

Relating and Supporting Industry

Answer 13

• Companies in an internationally competitive industry do not exist in isolation
• Supporting industries form “clusters” of economic activity in geographic area
• Each industry reinforces the competitiveness of every other industry in the cluster

Question 14

Firm Strategy, Structure, and Rivalry

Answer 14

• Highly skilled managers are essential because strategy has lasting effects on the firms competitiveness
• Domestic industry whose structure and rivalry create an intense struggle to survive strengthens its competiveness

Question 15

What does the government do

Answer 15

• Increase pace of privatization of state-owned companies
• Focus on specialized factor creation
• Stimulate early demand for advanced products
• Stimulate local rivalry (limit direct cooperation and enforce antitrust regulations)